NASE Blogs

From The Trenches ... Employee or Independent Contractor?

Tuesday, July 06, 2010

Q.  I use independent contractors and have heard horror stories about businesses being nabbed by the IRS for not treating independents as employees resulting in fines in the thousands of dollars. How can I protect myself from getting in trouble with the IRS?

 

A.  The independent contractor question has been an ongoing “gray” issue with the IRS for years. All you have to do is read IRS publication 15 (Circular E) to see how convoluted the definitions of employee and independent contractor are. While there have been and are efforts in Congress to get a more definitive clarification on just who is an independent contract, there is nothing immediate on the horizon.

It is also important to remember that it isn’t just the IRS that is an issue. Your state also defines who is and who is not an employee and a common scenario for having “worker” problems starts with the state offices (unemployment or workers compensation) and not the IRS. 

The key is for you to keep within the boundaries of how you treat workers and understand the risk if you want to treat someone as an independent contractor when they really fall within the definition of an employee. 

Start with understanding the federal definitions by understanding IRS publications 15 and #15-A which give a basic overview of how the feds define an employee and the questions used in making a determination (download over the Internet by going to www.irs.gov). Also go to your state department of labor or unemployment department to get your state definition of employee and independent contractor. 

One of the most important factors in making a determination between an employee and independent contractor deals with the control you "may" have over someone. Also, do they provide similar services to others as a business or are you the only business they perform work for. If you control how, when, and where a person accomplishes their work tasks, they are employees and not independent contractors.

If, on the other hand, the person operates as a business and you are only one of their customers they will likely be looked at as an independent contractor.A couple of areas where businesses make mistakes is thinking that just by having an agreement or that the person doesn't have a specific schedule and can accept work or turn it down makes them an independent contractor. While these two items are part of the issue, they don't clearly make a definition of an independent contractor.

If you use people and classify them as independent contractors, don't try to make them such if they are "really" employees. If, on the other hand, they are independents but might fall into the gray area make sure you dot all your "i"s and cross all your "t"s. Things like having a copy of their business cards or an assumed name certificate filed with the county clerks office. Make sure you use contracts and that the person gives you invoices to pay from. Also, be very cautious when you are the one and only source of income from the type of work they are doing for you. 

As a closing note ... you generally don’t even have to worry about the IRS or your state regulators knocking on your door to “check up on you”. In the vast majority of the cases where you are challenged it comes from none other than the person working for you! You might get disenchanted with them and terminate their services. Or, they might feel you are taking advantage of them! Or, they get injured while working! Any of the above or numerous other situations and the person goes running to the closest government office to file a complaint. Then ... is when you have some bureaucrat knocking sending you a letter that they want to review your records. 

So, just because you think that you have a good relationship with someone you are treating as an independent contractor, don’t think that you aren’t rolling the dice ... because you are!

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